Sole Trader or Limited Company?
Congratulations on deciding to set up a business! One of the first things you now need to decide is the legal structure of your business. This post is designed to give you some high-level considerations to think about when making that decision.
For the vast majority of people and businesses, the decision comes down to being a Sole Trader or a setting up a Limited Company.
What is a Sole Trader?
A sole trader is a very simple business structure in which the owner and the business are the same legal entity.
What are the benefits and cons of being a Sole Trader?
Benefits: There are benefits to being a sole trader which include:
- Straightforward setup: You register as a sole trader with the Revenue which is quick and easy
- Admin Costs: There is less paperwork and administrative work when compared to operating a limited company
- Control: You maintain control and retain all the profits
- Privacy: You don’t need to file financial statements with the Companies Registration Office (CRO) which become public like limited companies
Cons: Sole Traders have some perceived challenges and limitations:
- Taxation: All profits of the company are subject to Income Tax (potentially at 40%)
- Unlimited Liability: As the business and owner are the same person, you, as the owner, are personally responsible for all the debts and obligations of the business.
- Long term planning: If a business owner ceases to run a sole trader business, the business may cease to exist and there could be limited scope for issues like adding investors or retirement planning.
- Potential funding issues: If you are looking to raise finance for your business, banks and lenders may prefer to lend to Limited companies as opposed to Sole Traders.
What is a Limited Company?
A limited company is a separate legal entity from its owner/s.
What are the benefits and cons of being a Sole Trader?
Benefits: There are benefits to setting up a Limited Company which include:
- Limited Liability: A Limited company is designed to protect the personal assets of its shareholders by being a separate legal entity to them. This protection isn’t absolute but in general is a protection shareholders/owners can rely on.
- Taxation: Trading profits of a Limited company are subject to 12.5% Corporation Tax which is lower than personal income tax rates. This allows for tax planning.
- Long-Term Planning: Owning a profitable Limited company allows for investors and long-term tax planning opportunities that can outweigh any additional compliance obligations and costs.
Cons: Sole Traders have some perceived challenges and limitations:
- Setup and ongoing compliance costs: Setting up a Limited company as well as the ongoing administration involved can incur costs; both time and financial
- Public Availability: Limited companies are required to file Financial Statements with the CRO in Ireland which can be accessed by the public. While the information that is publicly available can be limited in nature, it may be more information than certain owners wish to share.
- Company Secretary: Limited companies are required to have a Company Secretary which at a minimum, needs to be a different individual in the instance where there is only one director in the company.
Conclusion
As you can see from the above, advice on which legal entity is best for your business depends on your goals and objectives for the business so needs consideration. In short, small businesses or freelancers starting out, the sole trader route is most likely going to be the most beneficial whereas someone with large profits who wants to protect their personal assets, a limited company is likely the route they will choose.
It is also possible to switch from a sole trader to a limited company at a future date but will require effort as well additional costs to the business.